Why stock analysts may make wrong predictions?

Arie Harel and Giora Harpaz

Economics Letters, 2024, vol. 244, issue C

Abstract: Investors and financial analysts employ various mathematical and statistical methods to forecast stock prices. An investor or a stock analyst with a superior forecasting method can harvest huge and almost riskless profits. This is the reason why so many people are investing time and money enthusiastically in developing methods to correctly predict future stock prices. In this note, we demonstrate that even if a sophisticated investor or a stock analyst has superior (but not perfect) forecasting methods, she/he can suffer from a large false positive error. We provide a simple formula for the probability of the rate of False Positives, and analyze its properties.

Keywords: Stock prices forecasting; Bayesian analysis (search for similar items in EconPapers)
JEL-codes: C11 C53 G10 G17 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:244:y:2024:i:c:s0165176524004403

DOI: 10.1016/j.econlet.2024.111956

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